The current market environment is producing difficult decisions for those with both long and short positions. As reported in a recent Reuters article [1], hedge fund manager and short seller Douglas Kass has been cutting back on his positions. As mentioned by Kass: "It is a dangerous time for the longs and for the shorts. This is a time to watch and not a time to play. It is time to move to cash." Kass has recently said he was still short Fannie (NYSE: FNM [2]) and Freddie (NYSE: FRE [3]), even after the government takeover. Watching and not playing may end up being good advice as it certainly is a difficult and dangerous time for both the longs and shorts.  As with any panic and sell-off, there is always a desire to lighten up, yet always the worry of selling at the bottom. I must say that it kind of amazes to me that we have not sold off more given some of the news hitting the street, especially when you consider large sell-offs from the recent and not so recent past, such as the 22% sell-off in the DJIA in 1987.

No doubt this was a different situation, circumstance, network trading system, and general market psychology, but it was also a situation that did not see they types of buyouts and failures (and potential failures) that we have seen with Lehman Brothers (NYSE: LEH [4]), Merrill Lynch (NYSE: MER [5]), AIG (NYSE: AIG [6]), and Fannie and Freddie, not to mention the on-going housing and credit crisis and previous Bear Stearns failure. Not sure if that means we have responded better this time, or whether the real pain is yet to be felt. If one year ago you would have been told that in a few weeks time Fannie and Freddie would be taken over by the government, Merrill would be sold, Lehman would go bankrupt (and Bear was already gone), and AIG was in trouble and days/hours from failing, 22% down might not have been seen as an over-reaction. There is concern in the market, no doubt, but not the level of fear I would expect. The VIX is signaling some fear again as it moves significantly above 30, but it did so back in March as well. If fear is not driven by having the Fed and Treasury finally back-off and not agree to be a backstop for all, what will? Is this it?